Prescription drug benefits: cost management issues for Medicare

Health Care Financing Review, Winter, 2003 by Peter D. Fox

INTRODUCTION

Two primary factors underlie the interest in a Medicare drug benefit. First, prescription drugs represent a major expense for Medicare beneficiaries. In 1998 an estimated 27 percent of beneficiaries had no prescription drug coverage (Poisal and Murray, 2001), and for those who did, the scope of that coverage was highly variable. However, this figure, which is based on the MCBS conducted by CMS, likely overstates the prevalence of coverage (Fox, Snyder, and Rice, 2003). The U. S. Congressional Budget Office (2002) estimates spending on prescription drugs by Medicare beneficiaries to average $2,440 in 2003, of which 40 percent, or $976, is out-of-pocket. Ten percent of beneficiaries in 2003 can be expected to incur prescription drug expenses, reimbursed and non-reimbursed, of $6,000 or more (Henry J. Kaiser Family Foundation, 2003). Further-more, prescription drug costs have been escalating at double-digit rates in recent years. (1)

Second, advances in pharmacology have led to the development of drugs that can be lifesaving and that are an integral part of medical practice. For example, new developments in lipid (cholesterol) lowering drugs and heart medication have undoubtedly resulted in improved health status. Medicare covers physician office visits but not what is commonly the major outcome of that visit: a prescription, which is often more costly than the visit itself. Indeed, lack of coverage, particularly among beneficiaries with low or moderate incomes, can result in needed drugs not being purchased, in some cases resulting in higher hospital and other medical costs.

Simultaneous with the rise in drug costs has been increasing private sector sophistication in managing drug benefits, facilitated by developments in computer technology. In particular, the electronic processing of drug claims has resulted in lower processing costs and far better information than was available a few years ago. As a result, private plans and PBMs--companies that administer the drug benefits on behalf of these plans are able to promote low-cost alternatives and reduce the consumption of inappropriate drugs while encouraging consumption of needed ones. In many instances, cost management and the promotion of appropriate medication practices are intertwined.

This article identifies key questions related to the management of the cost and utilization of a Medicare prescription drug benefit in a fee-for-service system, drawing heavily on the techniques adopted by many private sector purchasers and various government entities, including in their employee health benefits programs.

The next section of this article presents an overview of how PBMs administer drug benefits. The article then addresses the following policy questions that the Medicare Program will confront:

* What drugs should be covered?

* How inclusive should the pharmacy network be, since broader networks generally entail paying the pharmacies somewhat higher dispensing fees?

* How can beneficiaries be encouraged to obtain generic drugs, when available, rather than more expensive brand-name drugs?

* For drugs for which generic equivalents are not available, how can beneficiaries be encouraged to obtain less-expensive brand-name drugs where they are presumed to be equally effective?

* How can drug utilization best be managed?

The next-to-last section discusses several other policy issues that Medicare faces. The article concludes with a discussion of broad issues associated with the administration of the Medicare Program.

The information in this article is derived from three sources. First, extensive interviews were conducted with individuals who have extensive clinical and administrative experience in pharmacy benefits administration. Second, a literature review was conducted. Third, the author has drawn from his experiences as a consultant assisting private sector health plans and other purchasers of drug benefits to evaluate and select PBMs. On several occasions, this article reports survey data from employers collected by the Pharmacy Benefit Management Institute (2002). Although as good as any of the employer surveys, all of these surveys raise questions of reliability and validity; thus, the data should be regarded as approximations only.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), extending prescription drug coverage to Medicare enrollees, was enacted in December 2003. It addressed some of the issues discussed in this article, including legislating that all drugs that can only be dispensed by prescription will be covered; that, in order to avoid excessive market power being concentrated in the federal government, PBMs and other private entities involved in the administration of the program will negotiate prices and establish formularies; and that these entities will absorb a significant share of the risk for the new benefit. In the interest of analytic completeness, the full array of options is presented in this article, including those that are addressed by this legislation.